Invest in small company shares if you are aiming for bigger returns

Smaller stocks can be more volatile than blue chips, but they have outclassed the market as a whole over the long term, writes Kathryn Cooper

INVESTORS in the smallest companies have enjoyed the best returns over the long term.

If you had invested £1 in the equity market at the start of 1955, you would now have £486 — equivalent to a return of 13.5% a year, according to ABN Amro, the investment bank.

An investment of £1 in the Hoare Govett Smaller Companies index of the smallest 5% of firms in the market would now be worth £1,513 — a return of 16.1% a year. If you had invested £1 in the Microcap index, which tracks the smallest 2% of companies in the market, you would have £8,123 — a return of 20.2% a year.

The biggest stock in the Microcap is Sanctuary, an entertainment-services firm worth £160.5m. The smallest is Associated British Engineering, worth £600,000. By contrast, the biggest business in the FTSE All-Share, BP, is worth £95.7 billion.